C.D. Howe Finds Little Right with Toronto Land Transfer Tax

As Canadians try anxiously to peer into the future of their country’s gravity-defying housing market, a high-profile think tank is taking a look back at the damaging impact of land transfer taxes imposed in recent years.

The C.D. Howe Institute, a market-oriented think tank, says the land transfer tax introduced in Toronto in 2008 has depressed sales volumes by an annual average of 16%.

C.D. Howe found much that’s wrong — and little that’s right – with Toronto’s land transfer tax, and, by extension, land-transfer taxes in other cities, including Montreal.

Toronto’s version of the tax has a top marginal rate of 2% of a house priced above C$400,000. Together, municipal and provincial taxes on the sale or transfer of real estate in Canada’s biggest city impose a marginal rate of 4%. Toronto is tied with Philadelphia for the highest rate in North America.

The tax reduced the average sale price in Toronto by 1.5%, and has pushed down sales volumes, C.D. Howe found in its recent study.

“[The tax] puts a wedge between the price a buyer can afford and the minimum price a seller is going to accept,” says Benjamin Dachis, senior policy analyst at the institute.

Mr. Dachis found that the tax actually hits harder in neighborhoods where prices are below the mean for the Greater Toronto Area.

For high-end sellers in Toronto’s tony neighborhoods, the tax is an inconvenience. For those in below-mean neighborhoods, the added cost the tax imposes on a sale is much more than that, he says.

“Those few thousand dollars mean a lot to those sellers,” he says.

As Canadian homeowners and the country’s policymakers worry about the extent of the housing-market correction that now seems virtually inevitable, the restraining effects the transfer tax has on sales might seem a desirable way of helping curb market excesses.

But Mr. Dachis says the land-transfer tax isn’t effective for that purpose.

The tweaking of rules for insured mortgages that the federal government imposed in July, the fourth tightening in as many years, is a more effective approach, Mr. Dachis says.

It should be relatively easy for Toronto to relinquish the land-transfer tax, he says.

In 2011, the city collected 319 million Canadian dollars (US$325.3 million) from the tax, or 3% of its annual operating budget. But the revenue stream from the tax is volatile; it’s been strong because of the market boom in the last few years, but could dry up as the market corrects, Mr. Dachis says.

Toronto, and other municipalities with similar levies, would be well advised to replace the tax with a boost to property-tax rates that generate the same revenue, he says.

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